As announced yesterday, we’ve extended the deadline to participate in the Domestic Stock Plan Administration Survey that the NASPP co-sponsors with Deloitte Consulting. For today’s blog entry, I have six things I am excited about learning from this year’s survey.
Domestic Mobility Compliance: New this year, we’ve added questions on tax compliance for domestically mobile employees. This is an area of increasing risk and I’m curious to learn how far companies have come in their compliance procedures.
ESPP Trends: This survey takes an in-depth look at the design and administration of ESPP plans. I hear rumors of increased interest in ESPPs—both in terms of companies implementing new plans and enhancing the benefits in their existing plans; I’m excited to see if this plays out in the survey results.
Stock Plan Administration Staffing: This is the only survey I’m aware of that collects data on how stock plan administration teams are staffed, the department that stock plan administration reports up through, and how companies administer their plans. It is always intriguing to see the trends in this area.
Ownership Guidelines: The prevalence of ownership guidelines has increased dramatically in the last decade, with 80% of respondents to the 2014 survey reporting that they have these guidelines in place. Has this trend topped out or will we be reaching near universal adoption of ownership guidelines in this survey?
Rule 10b5-1 Plans: These trading plans have become de rigueur for public company executives, with 84% of respondents to the 2014 survey allowing or requiring them. We’ve expanded this area of the survey to capture more data on policies and practices with respect to these plans.
Director Pay: The survey reports the latest trends in the use of equity in compensating outside directors. I’m particularly interested in seeing what percentage of respondents indicate that they have imposed a limit on the number of shares that can be granted to directors. This is a best practice to avoid shareholder litigation but adoption of it was low in the 2014 survey—have we made progress on this in the past three years?
If you are interested in these trends, too, you’re going to want to participate in the survey so that you’ll have access to the results. It’s not too late to participate, but you have to do so by the end of this week. We’ve already extended the deadline once; we can’t extend it again. Register to participate today!
* Only issuers can participate in the survey. Service providers who are NASPP members and who aren’t eligible to participate will receive full access to the published results.
It’s not often that the worlds of professional sports and equity compensation intersect. True, I have a Google alert set up for “stock options” that sometimes returns articles about how the stock of football players impacts their career options (as in “Joe Schmo played really well in the last game; his stock is really rising”), but that’s not what I’m referring to. I’m talking about domestic mobility. While we are struggling with how compensation is taxed when employees travel from one state to another, this is an issue that professional sports has been dealing with for a long time now.
Here are a few concepts discussed in the articles that are applicable to equity compensation:
1. If the employee is a resident in a state that has income tax, 100% of the employee’s compensation, including any gains on stock options or awards, is generally taxable in that state. This is true even if the compensation is also taxable in another state.
2. Generally, compensation earned for work performed in another state (that has income tax) is also taxed in that state. For example, when your favorite non-Californian athletes play in California, they have to pay California state income tax on the portion of their compensation attributable to those games. In the context of stock compensation, this could apply to employees on assignment in another state, employees in remote locations that regularly travel to headquarters, employees in any location that travel to other states for work, employees that live in one state and commute to another for work, and a host of other situations.
3. The amount of income attributable to the employee’s non-resident state is generally determined by dividing the days worked in that state, referred to as “duty days,” by the total days over which the compensation is earned. In the context of stock compensation, the period over which the compensation is earned is most likely the vesting schedule.
4. Employees may be able to claim a credit in their state of residence for taxes paid in other states. Unlike a tax deduction, which reduces the income subject to tax, a credit is applied to the employee’s ultimate tax liability.
I’ve used the words “generally,” “typically,” and “most likely” a lot in this blog entry. It’s not that I have a fear of commitment, it’s that there are fifty states and they all write their own tax laws. As with anything that is legislated at the state level, the laws can, and do, differ by state.
Everyone else is talking about Brexit (the vote in the UK to leave the EU), why should the NASPP Blog be left out of the conversation? For today’s entry, I discuss what Brexit might mean for your stock plans.
The good news is that the vote is advisory, so it isn’t as if the UK has immediately exited the EU. They are still part of the EU for the short-term. The UK government and the EU have to come to an agreement about how the exit plan will work and various experts have indicated that this could take two years or more.
How Will Stock Plans Be Impacted?
By now, we are all too familiar with the EU Directives that impact stock compensation. While the Directives are complicated enough, in and of themselves, if the UK leaves the EU, things could get a lot more complicated. The UK will have it’s own rules that may or may not be the same as the rules in the Directives. A recent alert by Baker & McKenzie summaries a number of areas in which stock compensation offered to employees in the UK could be affected.
Securities Laws: The EU Prospectus Directive (including both the filing requirement and exemptions) will no longer apply in the UK. This could turn out to be better or worse than the way things are now: the UK could require companies offering stock compensation to file a prospectus (probably worse), could provide an exemption for stock plans (probably the same as now for many companies, depending on the requirements for exemption), or could recognize prospectuses filed in the EU (or even in countries outside of the EU, such as the United States) (the same or better).
Data Privacy: The EU Data Privacy Directive would also no longer apply in the UK. The EU has proposed new rules for this directive, so right now, we don’t know what the final rules will be for any countries in the EU, much less the UK. But once the UK has left the EU, they can determine their own rules; maybe these rules would be similar to the rules that the EU adopts, maybe not. One bit of good news is that Baker & McKenzie notes that “It would be surprising … if the UK would not consider consent to be a valid ground to collect, process and transfer personal data.” Since that is how most companies comply with the EU Data Privacy Directive for their stock plans, little may change here.
Discrimination: There are a number of EU Directives that prohibit discrimination against specified groups of employees. Those Directives would also no longer apply in the UK, but the UK would be free to adopt its own rules on discrimination. Baker & McKenzie notes that they do not expect to see substantial changes here.
Social Insurance, Too
An alert by EY notes that Brexit may also impact the social insurance obligations of mobile employees, their employers’ compliance obligations, and the benefits mobile employees are entitled to. Currently, the EU governs how social insurance applies when employees move between countries in the EU. Unless the UK comes to an agreement with the EU that the EU rules still apply to employees moving between the UK and other EU countries, individual agreements would have to be put in place between the EU and all the EU countries. Some of these agreements exist, but they haven’t been updated since the EU established its rules. Many have expired or don’t address how mobility works in today’s world. This could get ugly.
What About Companies that Don’t Have Stock Plan Participants in the UK?
For those companies, there shouldn’t be any direct impact to their stock plans (other than the impact of stock price volatility resulting from the economic uncertainty caused by Brexit). But, if you are a US-based company with a multi-national stock plan, chances are that you have stock plan participants in the UK. In the NASPP/PwC Global Equity Incentives Survey, the UK is second only to the US in terms of countries where respondents have employees and offer stock compensation.
More to Come
I’m sure there will be more implications to think about as the UK’s exit looms closer. At this year’s NASPP Conference, our perennially popular session, “Around the World in 60 Minutes: Key International Updates” will most certainly have a lot to say about Brexit, as will the session “Making Sense of Europe.” Be sure to attend one or both of these sessions so you are up-to-date on how your stock plan participants in the UK will be affected.
This past summer, the NASPP and Solium co-sponsored a quick survey on global stock plan administration. We asked companies about the technological challenges they experience when it comes to administering global stock plans, focusing on 12 primary challenges related to tax compliance, financial reporting, and other administrative matters. Close to 70% of respondents indicated that they struggle with four or more of the challenges identified and several noted that they struggle with nine or more of the challenges.
For today’s blog entry, I highlight five things I learned from the survey:
1. There are still a lot of manual processes out there.
Two-thirds of respondents say they spend too much time on manual processes. This is a high-risk proposition: it is difficult to implement adequate controls over processes and calculations performed in a spreadsheet. This seems especially concerning given that the SEC is in the process of adopting rules requiring recovery of compensation for all material misstatements, even if due to inadvertent error (see “SEC Proposes Clawback Rules,” July 7, 2015). One incorrect calculation discovered too late could result in recoupment of bonuses and other incentive compensation paid to executive officers.
2. Tax compliance is a top concern for companies.
This really isn’t a surprise—let’s face it, tax laws outside the United States are a hot mess. Every country does something different. Some countries change their laws every few years (I’m looking at you, Australia and France) and grandfather in old awards. Some countries have different rules for social insurance taxes vs. income taxes. Add in mobile employees and, well, you have a lot of work for tax lawyers.
3. Regulatory compliance is also a challenge.
56% of respondents cite keeping up with regulatory changes as a top challenge and 45% cite regulatory requirements in other countries. Regulatory compliance goes beyond tax laws to include things like securities laws, data privacy (a hot topic these days, see “Data Privacy Upheaval,” December 3, 2015), labor laws, currency restrictions and a host of other issues. It’s hard to stay on top of it all.
4. It’s the participants that suffer.
Ultimately, in the struggle to administer a global stock plan, something has to give and that something is usually the participant. Only 50% of respondents offer a qualified plan in countries where they could; the hurdle of regulatory compliance gets in the way. And 75% of respondents said that they would focus more on employee education if they could just spend less time on basic administration.
5. Expectations are low.
When we asked companies what is on their wish list for their administrative system, I was surprised at how low some items ranked (it was a “check all that apply” question, I thought everyone would want just about everything). For example, despite the fact that 71% of respondents reported tax-compliance for mobile employees as a top challenge, only 64% wanted a system that could calculate tax liabilities for mobile participants. It left us wondering if companies need to dream bigger for their administrative platforms.
Check out the White Paper and Survey
If you haven’t had a chance to read it yet, check out the white paper on the survey results and download the full results from the Solium website.
Globalization Continues: Back when we did the 2012 survey, 20% of respondents said they expected to increase global participation in their stock plan and this trend held steady in 2015, with 19% again expecting to increase participation. In addition 77% of respondents said they expect global participation to remain the same. That leaves only a very small percentage of companies that expect to pull back their global stock plans.
Compliance Reviews Are More Routine: The percentage of respondents who said they conduct annual compliance reviews of their global stock plans increased to 43%, up from 34% in 2012. At the same time, respondents conducting only sporadic reviews dropped to 40%, down from 45%. It can be risky to wait until you hear about a regulatory change to conduct a compliance review; annual reviews help ensure that you know when the laws impacting your global stock plan have changed.
UK Takes the Lead in Challenging Tax Compliance: We asked respondents to indicate which countries they found to be challenging in terms of tax compliance. The UK was first, with 46% of the votes, up from 36% (third place) in 2012. China, however, is hanging in there at second place with 42% of the votes (China was in first place in 2012). France dropped to third place, with 26% of the votes (down from second place and 38% of the votes in 2012).
Mobility Compliance Up: The percentage of respondents tracking mobile employees continues to increase: 87% of respondents track formal assignees (up from 80% in 2012), 62% of respondents track mobile employees who aren’t part of an assignee program (up from 60% in 2012), and a surprising 27% track business travelers (up from 18% in 2012). But the tools for tracking mobile employees still leave something to be desired: 36% of respondents track this in an Excel spreadsheet, up from 29% in 2012. About another third (32%) outsource tracking to a consultant or TPA. The final third use a hodge podge of methods.
Participant Understanding Looks Like a Mountain Rather Than a Bell Curve: Only 34% of respondents felt that their global participants understand a good deal or completely understand their stock plan benefits. That leaves a two-thirds majority for whom participant understanding is at best, somewhat or partial. Global stock plans are a very expensive employee benefit, both in terms of the P&L and administrative cost. It seems a little crazy to invest resources like this in a plan and not also invest in the education to make sure participants understand it.
Be sure to tune in to the webcast later today to learn more highlights from the survey.